Seagate Technology Holdings Plc (STX) — Q2 2025 Transcript

Thank you. Hello, everyone, and welcome to today's call. Joining me are Dave Mosley, Seagate's Chief Executive Officer; and Gianluca Romano, our Chief Financial Officer. We've posted our earnings press release and detailed supplemental information for our December quarter results on the Investors section of our website. During today's call, we will refer to GAAP and non-GAAP measures. Non-GAAP figures are reconciled to GAAP figures in the earnings press release posted on our website and included in our Form 8-K. We've not reconciled certain non-GAAP outlook measures because material items that may impact these measures are out of our control and/or cannot be reasonably predicted. Therefore, reconciliation to the corresponding GAAP measures is not available without unreasonable effort. Before we begin, I'd like to remind you that today's call contains forward-looking statements that reflect management's current views and assumptions based on information available to us as of today, and should not be relied upon as of any subsequent date. Actual results may differ materially from those contained in or implied by these forward-looking statements as they are subject to risks and uncertainties associated with our business. To learn more about the risks, uncertainties, and other factors that may impact our future business results, please refer to the press release issued today and our SEC filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q, as well as the supplemental information, all of which may be found on the Investors section of our website. Following our prepared remarks, we'll open the call up for questions. In order to provide all analysts with the opportunity to participate, we thank you in advance for asking one primary question and then reentering the queue. With that, I'll now hand the call over to you, Dave.

Thank you, Shanye, and hello, everyone. Seagate closed out calendar 2024 on a strong note, driving 7% sequential revenue growth in the December quarter. Our non-GAAP gross margin expanded by more than 200 basis points and non-GAAP earnings per share exceeded $2 for the first time in 12 quarters, underscoring our continued focus on profitability. Our performance was supported by increased demand across nearly all markets we serve with the most significant growth in the cloud sector. This broad-based demand from global cloud customers led to an almost doubling of nearline product revenue in the December quarter on a year-on-year basis and close to 60% nearline revenue growth for the entire calendar year. We are experiencing strong momentum with our areal density-driven roadmap, which positions us well to offer compelling storage solutions to our customers and also supports our expectation for significant profitable revenue growth for fiscal 2025 and beyond. We continue to advance our product roadmap and have achieved several key milestones related to our HAMR-based Mozaic platform in the December quarter. We completed qualification and started to ramp HAMR-based products to our initial CSP customer. Earlier today, we also announced sampling of Mozaic drives with capacities of up to 36 terabytes. Overall, Seagate is in an outstanding competitive and technology position in a strengthening demand environment. Prior to discussing the end-market environment, I'll briefly address the production issue that we disclosed last month, which has led to supply constraints for the March quarter. Gianluca will provide details on our fiscal Q3 outlook. However, I can confirm that this issue has been resolved, we are able to meet our built-to-order commitments to major customers, and we expect the revenue impact to be limited to the March quarter. Now, turning to the mass capacity markets, cloud remains the primary demand driver. The surge in nearline product demand that I referenced earlier aligns with the nearly 50% increase in cloud capital investments made by our customers in 2024 with their CapEx expected to continue growing in calendar 2025. We believe hyperscale customers are continuing to manage their inventory levels well while making infrastructure investments to support growing demand for traditional services, advertising, and e-commerce as well as emerging GenAI applications. These applications will be prolific creators of data. And given that a substantial volume of the data will be stored on HDDs, we expect GenAI to drive future mass capacity storage growth. This is particularly true of data-rich imagery and video content created by GenAI models, which is projected to expand nearly 170 times from 2024 through 2028. Today, HDDs play a crucial role in housing the massive datasets required for training AI models serving as central repositories when these datasets are not actively being processed by GPUs. These mass storage data lakes form the backbone of trustworthy AI by storing checkpoints or snapshots of AI model datasets, ensuring that data is both retained and available in the future for continuous model refinement. A recent survey of over 1,000 business leaders and AI decision-makers underscores the critical importance of data retention and checkpoints in enhancing the quality of AI outcomes. These insights are not only applicable for the cloud, but also the edge where the vast majority of data is generated. The enterprise markets fall under this edge umbrella. We expect enterprises to replicate and store more data locally at the edge as AI computing and inferencing moves closer to the source of data generation. VIA is another opportunity-rich market at the edge. For some time now, we've spoken about the increased adoption of AI analytics within the VIA markets, which help form actionable insights from data for applications such as smart cities and smart factories. In the December quarter, average drive capacities for VIA products set a record, reflective of increasing uses of video analytics as well as longer data retention periods. Overall, we believe mass capacity storage remains both an enabler and a beneficiary of these emerging data trends. Seagate is in a great position to address the resulting demand growth through our areal density-driven product roadmap. As we've shared in the past, we are maintaining a disciplined approach in planning our production capacity. We will leverage technology transitions to support exabyte growth rather than adding new head and media unit capacity. Looking at our long-term roadmap, our Mozaic-based technology provides Seagate with a highly capital-efficient means to satisfy growing exabyte demand to deliver a strong TCO value proposition for our customers and expand profitability over the long term for the company. Today, we have continued to ramp our 24-28 terabyte PMR platform, which has rapidly become our top product platform in terms of both revenue and exabyte shipments. At 30 terabytes or higher, our Mozaic HAMR technology delivers leading capacities and is gaining momentum across our customer base. There are now multiple customers qualified on this platform across each of the mass capacity end markets. Currently, we are ramping volume to our lead CSP customer while progressing on qualifications at additional cloud and hyperscale customers. These qualifications will set the foundation for the next phase of our Mozaic volume ramp starting in the second half of calendar 2025. We are confident that our Mozaic HAMR technology provides a strong and sustainable competitive advantage at scale for mass capacity storage and underpins a cost-efficient roadmap to build on those advantages. Consistent with feedback we've received from many cloud customers, AWS highlighted at their recent re:Invent conference that adopting the highest capacity hard disk drives allows their storage system architecture to lower costs, conserve floor space, and reduce power consumption. Data center architects will continue to adopt both hard disk drive storage and compute-oriented memory technologies such as NAND Flash to support the breadth of their workloads. NAND is best suited for high-throughput, low-latency tasks, while hard disk drives remain the preferred storage solution for the bulk of data storage needed in the cloud. We do not see these dynamics changing over the foreseeable future due to several advantages that HDDs hold over NAND. HDDs offer customers at least six times lower cost per terabyte of storage capacity. They possess a significantly smaller embodied carbon footprint and provide manufacturing scale that is highly capital-efficient. Wrapping up, Seagate is in position to deliver further improvements in revenue and profitability in fiscal 2025. Looking out further, the path is set up for Seagate with our steadfast focus on supply discipline in a favorable demand environment, a leading technology roadmap, and the tailwind of AI's massive data storage requirements.

Thank you, Dave. Seagate's strong December quarter results were highlighted by 50% growth in revenue and a four-fold increase in non-GAAP operating income on a year-over-year basis. We delivered December quarter revenue of $2.33 billion, up 7% sequentially. We increased non-GAAP operating income 22% sequentially to $538 million, translating to a non-GAAP operating margin of 23.1% of revenue. And our non-GAAP EPS was $2.03, at the high end of our guidance range, reflecting strong adoption of our high-capacity nearline drives along with ongoing price adjustment and cost discipline. Within our Hard Disk Drive business, revenue increased 8% to $2.2 billion with volume shipment of 151 exabytes, up from 138 exabytes in the September quarter. Mass Capacity revenue grew for the sixth consecutive quarter, reflecting continued strength in nearline cloud demand, along with anticipated improvement in the enterprise and OEM markets and seasonal uplift from VIA customers. Mass Capacity revenue and exabyte shipments both increased 9% sequentially and totaled $1.9 billion and 140 exabytes respectively. Starting this quarter, we are including nearline exabytes shipped to VIA customers within our overall nearline exabyte reporting. Many VIA customers are adopting nearline drives consistent with the shift toward more cloud-like solutions that we had highlighted last quarter. Consequently, we believe this reporting change more accurately reflects how customers are utilizing these drives and aligns with industry reporting standards. With this change to all periods presented, Seagate's total nearline shipments were 126 exabytes in the December quarter, up from 114 exabytes in the prior period. Our performance reflects strong demand for our 24 and 28 terabyte PMR products, particularly among cloud customers, as well as continued improvement in enterprise marked by record-high average drive capacity for the second consecutive quarter, extending the trend for a higher storage content per server unit. Sales of our Legacy products totaled $275 million, up 2% sequentially, supported by higher seasonal demand in the consumer market. Finally, for our Other business, which includes systems, SSD, and refurbished drives, revenue was $156 million, down slightly from last quarter as lower SSD revenue was partially offset by improved system demand. Moving on to the rest of the income statement, non-GAAP gross profit increased 14% sequentially in the December quarter to $825 million. This increase reflects continued revenue growth of Mass Capacity products, increasing mix of new high-capacity drives, ongoing price adjustment, and cost efficiencies. Our resulting non-GAAP gross margin expanded by 220 basis points to 35.5% at the company level, marking our seventh consecutive quarter of sequential gross margin improvement. Non-GAAP gross margin for the HDD business remained significantly higher than the corporate average. Non-GAAP operating expenses totaled $287 million, consistent with our plans and up 2% quarter-over-quarter. Other income and expense was stable at $86 million and are expected to be relatively flat in the March quarter. Adjusted EBITDA increased 19% sequentially in the December quarter to $591 million. Non-GAAP net income increased to $433 million, resulting in non-GAAP EPS of $2.03 per share, based on a diluted share count of approximately 213 million shares. Moving on to cash flow and the balance sheet. We continue to focus on driving free cash flow generation, which increased to $150 million in the December quarter compared with $27 million in the prior period. We continue to expect free cash flow generation to improve sequentially through the rest of the fiscal year. Capital expenditures for the quarter were $71 million. For fiscal 2025, we will maintain capital discipline and continue to expect CapEx to be at the low end of the long-term target range of 4% to 6% of revenue. We returned $148 million to shareholders through the quarterly dividend and closed the December quarter with $2.7 billion in available liquidity, including our undrawn revolving credit facility. Inventory increased slightly to $1.5 billion, primarily to support the ramp of new high-capacity products. Our debt balance was $5.7 billion at the end of the December quarter. Consistent with our intent to reduce debt, we retired approximately $479 million of notes as they matured in early January. As a result, we have no debt obligation until late fiscal 2027. We exited the December quarter with a net leverage ratio of 2.5 times and expect to see further reduction in the coming quarters. Turning now to our March quarter outlook. We expect ongoing demand strength from cloud customers to partially offset seasonal decline in the VIA and legacy markets, along with the supply constraints that we have already discussed. We still expect to meet our build-to-order commitments, but our ability to respond to in-quarter volume upside opportunities will be limited. Consequently, embedded in our guidance is approximately $200 million of revenue impact from these supply constraints. With that as a context, March quarter revenue is expected to be in the range of $2.1 billion plus or minus $150 million. At the midpoint, this reflects more than 25% year-over-year improvement. Despite supply limitation in the March quarter, ongoing demand for our latest generation nearline products, including Mozaic, offers the potential for sequential improvement in gross margin performance. We expect non-GAAP operating expenses to be in the range of $290 million and at the midpoint of our revenue guidance, we expect non-GAAP operating margin to remain in the low-20% range. We expect non-GAAP EPS to be $1.70 plus or minus $0.20 based on a diluted share count of approximately 214 million shares, and non-GAAP tax expense of roughly $20 million. In summary, Seagate's strong December quarter financial performance underscores our continued focus on enhancing profitability, optimizing cash generation, and driving growth. As we focus on capturing the significant opportunities ahead, we will remain diligent in supporting a healthy supply and demand environment, which we believe positions Seagate to deliver further improvements in revenue and enhance profitability this fiscal year and beyond.

Thanks, Gianluca. As data value continues to increase, so too does the strategic relevance of mass capacity storage, particularly in the era of AI. Against this backdrop, Seagate is executing a strong product and technology roadmap to deliver a compelling value proposition for our customers. In short, we are responding with technology to store the world's data. We've crossed an exciting inflection point with our Mozaic HAMR platform now ramping volume to address customer demand at exabyte scale. The Mozaic platform provides a capital-efficient solution for Seagate to sustain areal density leadership and effectively address the growing demand for mass storage. This paves the way for Seagate to offer significant economic advantages both to our customers and the company. These achievements are only possible through the hard work of Seagate's global team. I extend my thanks to them as well as recognize our suppliers, customers, and shareholders for their ongoing support. Operator, let's now open up the call for questions.

Hey, guys. Thanks so much for taking my question. Maybe, Dave, just to start, if I look to past June quarters, I know we're getting ahead of ourselves here, but we've seen sequential growth historically. And in light of your positive demand comments and the fact that March quarter supply issues would be transitory, how do you think about that incremental $200 million of shortfall in the March quarter? What exactly happens there? Does it get pushed to June? Does it get pushed to multiple quarters in the future? Can you just help us understand kind of the magnitude and timing of when you expect to call that back? Thanks so much.

Yes. Thanks, Erik. As you know, we've tried really hard to get predictable in the last couple of years, especially with the downturn. And so as we come out of it, we've really valued that predictability. This temporary issue that we're dealing with is limited to this quarter only, I think as we look out further and further, especially through some of the product transitions that are coming, we have confidence in the predictability. And so I think the exabytes are going to continue to grow, demand is going to continue to grow, we're confident in that and we'll get through those product transitions as well, which allows us to grow our margin profile as well. So, I do think this is a very temporary issue.

Yes, thank you. I just wanted to clarify the comment about the transitory nature of this $200 million. So, if it is transitory, should we think that the true baseline for March was $2.3 billion? And then June should be sequentially up from that. That's just a clarification, if you could clarify that. And my main question is really around the fact that you've seen six quarters of really strong nearline and mass capacity exabyte shipment increases. Historically, these have been 1.5 to 2-year cycles and then there's a period of pause. Can you perhaps maybe, Dave, share your view on where we are in the cycle and anything that you see that could cause the cycle to turn in 2025? Thank you so much.

Yes, Wamsi. I believe it's still early to label this as a cycle because the overbuilding at the beginning of the pandemic was likely significant. Over the last two years, exabyte shipments have been quite low, making this cycle markedly different from previous ones. However, our build-to-order approach is providing us with good predictability, and clients continue to seek more certainty regarding their data center builds. These data centers require population, and customers are refreshing old equipment or completely replacing entire data centers to enhance their capacity. The industry and supply chain appear to be becoming more predictable, which is encouraging. This gives us confidence for the remainder of the calendar year. Regarding Erik's question and the issue we are facing this quarter, it is challenging to determine whether this quarter's impact reflects a pull-in or a push-out in our predictable behavior over the past year. Nonetheless, I remain confident in our financial expectations and the product transitions we are undertaking, which are adding value for our customers and will be executed successfully. Gianluca, do you have anything to add?

Yes. Regarding the impact on the March quarter, the short answer is yes, we could have achieved higher revenue. The demand is present, but in the short term, we do not have enough volume to meet that demand. Therefore, we could have generated a greater revenue level. However, as Dave mentioned, we anticipate further improvement throughout the calendar year, so this will not adversely affect our overall results.

Yes. Thanks for taking my question. Gianluca, when I look at your guidance, it seems like your March quarter gross margin is about 36% give or take. And you said HAMR is obviously going to be accretive to numbers, and both you and Dave seem pretty optimistic on nearline for the rest of the year. So, is it fair to assume, as the nearline grows, the gross margin should improve quarter-over-quarter through the rest of calendar 2025 off of this 36% baseline in March? Thank you.

Yes. We see good opportunity to continue the trend that started like six quarters ago to improve our gross margin sequentially. Part is mix, of course, now moving more and more into the high-capacity drive give us opportunity to improve gross margin. And of course, there is always our strategy in terms of stable consistent price increase quarter after quarter, cost efficiency, HAMR will help us, especially in the second part of the calendar year when we can ramp much higher volume. So, no, right now, we are very confident that our profitability will continue to improve.

Thanks for taking my question. Dave, could you discuss what it means for the industry when HDD companies add capacity? Are you truly adding net new capacity and trying to return to a baseline level? What do you estimate Seagate's total exabyte capacity will be once these additions are complete? Additionally, I'm surprised that your gross margins are projected to rise in March, despite declining revenues and increased capacity. Can you explain what is going well or what is countering the expected headwinds in the March quarter that is allowing for an expansion in gross margins? Thank you.

Thank you, Amit. Looking back to three or four quarters ago, when demand was much lower, we were using older product generations and had reserves of those products. As demand has increased, those reserves have mostly been depleted, and we encountered some production challenges with new product generations. The key point to your question is about the product mix. As we enhance our higher capacity offerings, we believe this provides significant value for our customers. We also think it offers predictable economics for both our customers and ourselves, which is contributing to our margin structure.

Hi, thanks. I just wanted to ask about this $200 million and the effect into June again, because I'm not sure I understand what the message is. I think, Dave, in the remarks, you said that the impact will be completely limited to the March quarter. So, it sounds like you think that June, you get the entire $200 million back, but you seem like you're not really willing to clarify that. So, can you clarify exactly what you meant by the entirety of the impact is being felt in March?

Yes, thanks, Tim. This situation is due to a supply issue, not a demand issue. We have been communicating with our customers about what's happening since the conference in December. We can meet all our build-to-order commitments for this quarter. As for next quarter, we are working to recover from the issues as quickly as possible. Importantly, the challenge is not due to reduced demand, but rather our capacity to meet supply needs. Gianluca, would you like to add anything?

Yes. So, Tim, basically, as we explained in December, we did not start enough material in a certain period of time because we didn't put back the equipment that were necessary to produce the material. So, we don't have that level of supply, but could have been necessary to match demand in the March quarter. So, that $200 million is not coming back It's just material we were not able to start. And so we missed that opportunity in the March quarter and then we go back to June with the right level of supply that will match the June demand. But of course, the one that is in March is probably going away.

As we mentioned in December, this highlights the long lead times we face with some of the wafer equipment, which necessitates build-to-order predictability for our customers and ourselves. This issue began to emerge in late summer, and we recognized it in late November, but it is still impacting our operations. We will do our utmost to recover as much as we can, but we are dealing with a very steep ramp. This is not just a temporary setback; rather, it's a challenging ramp we are navigating. This quarter will be affected as the necessary parts are not flowing through as we had anticipated. However, we have identified and resolved the problem, and we are confident that we can meet demand in the next quarter and beyond.

Thank you for taking my question. You seem very confident about the potential for increased gross margin, especially as HAMR ramps up and you shift towards higher capacity drives. Could you share your thoughts on what you consider to be the appropriate margin for Seagate moving forward, given that you are currently performing well above your target range? Thank you.

Yes, that largely depends on the demand situation. We believe demand is improving, and we have a strong portfolio to meet it. Customers will continue to purchase the new drives with higher capacities because they will use them in data centers for the long term and recognize the value they offer. As we become more predictable in our build-to-order negotiations, we can engage in discussions about what we will produce, as we already have a clear understanding of our production plans. This approach has benefited the industry and our supply chain significantly, aiding our recovery from the challenges we faced a year or two ago.

Yes. And that target range that you are referring to, now we gave that target and we clearly said this is not including HAMR. So, of course, in future, we were already expecting a higher profitability and we will ramp HAMR in just two or three quarters from now. We will discuss maybe more at our Analyst Day in the future what will be our next model, but I would say I will not focus on that old gross margin range that we were discussing in the past.

Yes. Regarding margins, both gross and operating margins, it's important to note that despite our current revenue levels, we must continue investing in R&D to progress our roadmap, including advancements to four terabytes and five terabytes, as well as necessary capital expenditures. These investments offer significant value to our end customers, who expect us to continue this effort. Therefore, we will require the appropriate balance of margin and revenue to maintain our roadmap and deliver value to users. It's clear that the recent fluctuations in supply and demand during the pandemic have been challenging, but we're beginning to emerge from that situation, and people are gaining a better understanding of the financial impacts, which will help us become more predictable moving forward.

Hey, good afternoon, everyone. Dave, I was curious about the long-term effects of transitioning to HAMR. As you navigate the early stages of this new technology, does the customer mix or the pace of your ramping change? You mentioned adding additional cloud partners, but as you aim for 36 terabytes, how does this technology's market impact evolve?

I would say our initial ramp was more challenging than anticipated, even up to the last minute. We achieved excellent outcomes from the labs and early experiments, but we encountered some issues during productization. We don't foresee those issues affecting future productization. This should lead to shorter cycles. The strain on all subsystems, not just the recording subsystem, will still be significant as we progress from 30 terabytes to 40 terabytes and then to 50 terabytes. However, we are confident and have communicated that, based on our current observations, we will push as aggressively as possible through these transitions. The announcement that we are already shipping drives up to 36 terabytes has been made. From my viewpoint, we are moving forward positively. The industry is rewarded for advancements in areal density, which is how we provide value, and that is what we will continue to pursue.

Hey, guys. Thanks for taking my question. I just want to get a better picture for your mix of business. I think you like to talk on exabytes that are moving towards HAMR. You guys had originally talked about a unit forecast, you've adjusted that over time, but maybe as we look out into the calendar year 2025, you could talk about how much of your business in terms of mix is HAMR today and maybe how much you think exiting the year. Obviously, you had enough to impact gross margins in the near term. So, maybe if you could size that for us, that'd be really helpful.

Thank you, Tom. We discussed the rapid growth of the 24-28 platform, which is experiencing a significant increase in volume. There are many shared components with HAMR, allowing us to ramp up HAMR production quickly as well. Our focus is on completing qualifications and increasing production. Last year, we pushed through these transitions to restore some margin into the business. This year, the demand landscape is quite different, and the feedback from customers regarding their qualifications has changed significantly. We will proceed with more caution. It's important to note that HAMR still contributes positively to margins, and we aim to promote it while ensuring we meet customer needs. As we reach higher capacity points, the compelling value proposition for our customers is driving strong demand. In response to earlier questions, I believe we will see acceleration because we are already advanced in productization. We have learned valuable lessons that prevent others from having to face the same challenges, and the compelling value proposition is well understood by our customers.

Yes. Thanks for taking the question. I'm going to stick with the gross margin narrative here a little bit. Gianluca, if I try and make some adjustments for your non-HDD gross margin, I guess what I'd be left to think about is that your hard disk drive gross margin is probably in the 37% plus or minus range. I guess the question is that, would you say even today as you're initially ramping HAMR that your HAMR gross margin is accretive to the hard disk drive only gross margin? And is there anything structurally that keeps you from thinking, hey, gross margin could have a four in front of it just structurally as we look forward and pricing continues to progress, etc., etc.? Just curious on what your thoughts are.

Yes, Aaron, thanks. I'm quite satisfied with our current position. As we look ahead, we are securing business that is both beneficial and allows for higher capacity through these transitions, which boosts my confidence. Regarding a potential maximum capacity, that largely hinges on future demand, and we'll keep you updated. We have effectively restored the margin structure in the industry, and in some instances, achieved all-time highs. However, revenue and output have not yet returned to previous levels. We can definitely increase our output, but we want to do so in a predictable manner and protect what we've worked hard to rebuild. We are also dealing with some ongoing supply chain challenges that will persist for the next few quarters. We are in a transitional phase toward future models while striving to execute our current operations as efficiently as possible, and we are pleased with the progress we are making.

And Aaron, no, part of the confidence we have in improving gross margin even in the March quarter where, as you know, the revenue is lower, is coming from the increased volume of HAMR. So, in general, the mix moving to higher capacity drive has always helped us to improve margins and HAMR will increase a lot the capacity per unit, so it is a good contributor to the improved gross margin.

Yes, thank you. As we think about the sustainability of the cycle, are your nearline and hyperscale customers giving you more visibility today, which I think was six months or longer last quarter since you've experienced these production capacity constraints? And for my clarification question, does the production capacity address only HAMR drives or were these tools used for conventional nearline drives as well? Thank you.

Thanks, Karl. To address your second question first, the production capacity issue impacted non-HAMR drives, not the HAMR drives. It relates to the ramp of the 24-28. We've actually qualified that in some older programs, but it is the non-HAMR product that’s being affected. Looking further ahead, I believe we will pursue the HAMR transition more aggressively since it provides additional capacity points, as Gianluca mentioned. Higher capacity points allow us to refresh lower capacity points as well, which contributes to enhancing the margin across our entire portfolio, not just at the highest capacity point.

Yes, thank you. I was hoping you could talk about the visibility you're receiving from hyperscale customers today since those capacity constraints. Thanks.

Oh, yes. The built-to-order models we are developing have provided us with good visibility. As we address the supply constraints we faced this quarter, we are committed to fulfilling all our built-to-order obligations. On an individual account basis, this issue is nearly irrelevant for them. We're referring to Q4 as Q4, Q3 as Q3, and Q1 next year as Q1 next year. These models are aiding our visibility, and this temporary issue has little impact on the built-to-order model.

Yes. Hi, Dave and Gianluca. Just looking at the HAMR, when you look at your 150 exabyte product shipments or the 126 exabyte nearline, do you expect HAMR to get to like 10% to 20% of that mix by like first half calendar let's say 2026?

We certainly expect to ramp it up significantly. We're not providing a specific number, as our situation has changed compared to a year ago. However, we anticipate a strong ramp-up driven by customer demand due to the value proposition they recognize. It will also need to be accretive, which we have mentioned for several quarters, and we are confident in that. So, we will actively pursue this and drive volumes very soon.

Yes, Vijay, we will see improvements every quarter, but we need to consider the qualifications with different customers. We anticipate multiple qualifications from December last year through the middle of 2025. Therefore, we expect the majority of the ramp-up to occur in the latter part of 2025, which will lead to further enhancements in our business and performance in the coming quarters.

No, most of the tools that we're using for our non-HAMR products are convertible to the HAMR products. So, there's really no added tools that we need to bring on. We planned this transition for quite some time. We have stated that we would not add head and media unit capacity. The capacity gains we achieve are due to increasing areal density. This allows us to offer customers a 32 terabyte drive instead of a 24 terabyte drive, and hopefully in the future, a 40 terabyte drive, which provides more exabyte capacity and a better total cost of ownership proposition for them, enhancing their value and allowing us to increase our margins and ensure our plan is effective.

Good afternoon. Thank you for taking the question. I guess first question, it's a clarification. On the $200 million for March, is that completely traded away or are you expecting partial part of that business in the June quarter? And then for my main question, in your prepared remarks, you talked about increasing focus on imagery and video as part of generative AI. I'm curious if you've done any work in terms of sizing what that might mean. It looks like Meta is really the big driver today, but curious if you've sized it at all and how you think about the incremental demand to your overall business. Thank you.

Yes. Regarding the $200 million, we discussed this earlier. My perspective is that the build-to-order commitments are being fulfilled. Whether there are additional transactions this quarter or next, we'll address that. For the major accounts involved in build-to-order, there's no significant impact. It's important to note that we're dealing with a supply issue, not a demand issue. Demand remains strong. When we refer to video and imaging, we are generally talking about developments at the edge such as smart cities and smart factories, where data generated is eventually reaching the cloud. Additionally, there are significant video applications in the cloud. The usage of video on major media platforms is increasing, with longer and more numerous videos, including more hour-long documentaries. The introduction of AI-driven creation tools is enabling content creators to be more innovative. All these trends are advantageous for us. The initial demand resurgence we observed was among those servicing these models. Video is driving substantial demand in the cloud.

Thank you.

Thank you for taking my question. I would like to hear from both of you regarding the transition to HAMR. Gianluca, could you clarify when we might see the HAMR margins become accretive? Dave, in relation to that, how should we consider the pacing of HAMR volume given the current strong margins from legacy technology? I was thinking you might be more selective in rolling out HAMR given these margins, but you also mentioned an active approach to introducing HAMR to the market. Those are my questions. I appreciate your insights. Thank you.

Hey, Ananda. Yes, HAMR represents high capacity drives that are yielding a higher gross margin compared to other drives. As I mentioned earlier, the impact of this will be more apparent later in the year when we can increase the volume. While we wish we could scale up today, we need to complete several qualifications before we can significantly boost our production. However, like all high-capacity drives, we anticipate strong profitability from this product and technology.

Right. And Ananda, if this helps, if you go back a year ago when our gross margins were considerably lower, of course, we were saying HAMR is accretive to the gross margin. Now the gross margins are considerably higher on some of the legacy products like you talked about and some of the 24-28 PMR platform, PMR SMR platforms. HAMR is still accretive and more we can drive through these transitions that we're talking about, not only do we increase the top-line capacity, if you will, which provides such a compelling value proposition that we can actually get paid for it, but also we can start to refresh some of the lower platform drives, lower capacity points with fewer and fewer components inside and therefore, you get margin uplift that way. So, we're still driving the HAMR transition, if that helps.

Yes. Thanks for taking the follow-up. I guess a quick question on HAMR. The sampling of the 36 terabyte drives that you announced, is that with the same leading CSP that you qualified the earlier HAMR drives? And any color that you could share on HAMR units? Originally, your expectation was shipping 1 million in the first half of last year. Clearly, now with this ramp being much more significantly underway, would you say that it should be orders of magnitude higher than that in the second half of this year? Thank you so much.

Yes. Thanks, Wamsi. We're expanding our shipments to multiple customers and not just one. While I won't disclose details about any specific customer, we are currently seeing strong engagement from customers on the 24-28 product. As we previously mentioned, our factories are at full capacity and the ramp-up is significant. We'll gradually introduce some HAMR products based on when qualifications are finalized and what our customers specifically need. It's important to remember that customers also need to prepare their systems. Some are undergoing transitions related to silicon or software upgrades for fleet management features, and they may choose to implement those with the next-generation product. Therefore, ramping up HAMR and increasing shipments isn’t straightforward; we must complete qualification processes first. That said, we're committed to making this happen because we believe it adds significant value.

Yes, hi, thanks for taking my follow-up. Gianluca, a quick question. Of the 126 exabyte nearline you shipped in December, how much went to surveillance? You start to do a comparison because you did 109 in September, but that was all your traditional nearline definition. So, I'm just trying to figure out through 126, how much is surveillance versus traditional nearline?

In general, in different quarters about 4, 5 exabytes.

Thank you.

And our supplemental will show the history for the last five quarters so that you have like-for-like over the prior year period.

Thanks, Shanye.

Thanks, everyone. I wish everyone a Happy New Year, a Happy Lunar New Year. Really appreciate all the efforts of our employees and our suppliers in helping the recovery what's still ongoing and looking forward to talking to everyone this quarter or next quarter's call. Take care.